The five steps
The Department for Business, Energy and Industrial Strategy (DBEIS) have helpfully provided technical guidance which sets out a five step process to lawfully awarding a subsidy. Step one is addressed in our first article in this series and so this article focuses on the remaining steps.
- Determine whether a measure is a subsidy and what international obligations are relevant.
- Evaluate whether the measure is a prohibited subsidy.
- If you are in scope of the TCA, assess the subsidy against the ‘principles’.
- Assess the likelihood of triggering a dispute under the WTO Agreement on Subsidies and Countervailing Measures (‘ASCM’) rules and other Free Trade Agreements (‘FTA’).
- Record the award of the subsidy.
Step 1: Determine whether a measure is a subsidy
Determining which international agreement(s) apply to a particular measure is covered generally in our first article in this series and thus this section deals with whether a measure constitutes a subsidy for the purposes of the international regulation which (following that assessment) appears to be applicable. Where the TCA is applicable, the definition of subsidy is as follows:
A ‘subsidy’ is defined as "financial assistance which:
(i) arises from the resources of the Parties, including:
(a) a direct or contingent transfer of funds such as direct grants, loans or loan guarantees;
(b) the forgoing of revenue that is otherwise due; or
(c) the provision of goods or services, or the purchase of goods or services.
(ii) confers an economic advantage on one or more economic actors;
(iii) is specific insofar as it benefits, as a matter of law or fact, certain economic actors over others in relation to the production of certain goods or services; and
(iv) has, or could have, an effect on trade or investment between the Parties."
Public bodies will recognise the substance of many of these requirements from the EU state aid regime (‘economic actor’ replacing ‘undertaking’ for example) though they shouldn’t be taken as identical in their application. In the absence of developed case law expanding upon the application of these requirements in practice, as well as the pending arrival of a bespoke UK subsidy control regime, many public bodies may well take the view that a cautious approach is prudent at this juncture.
Step 2: Evaluate whether the measure is a prohibited subsidy or subject to conditions
Under its various international agreements, the UK has agreed to prohibit entirely certain forms of subsidies. Public bodies should thus consider if the measure proposed amounts to any of the following.
Under the WTO ASCM the following are prohibited in respect of measures affecting goods-based activities:
- subsidies where the award is dependent upon export performance.
- subsidies which make the award of the subsidy contingent on the recipient using domestic rather than imported goods.
Under the TCA those prohibitions are extended to also include measures affecting service-based activities and the following two categories are also prohibited:
- subsidies in the form of unlimited state guarantees.
- subsidies for restructuring an ailing or insolvent enterprise without a credible plan being in place to return the enterprise to viability (including specific rules for subsidies to restructure banks, credit institutions and insurance companies).
The TCA goes on to impart conditions (as opposed to an outright prohibition) on subsidies proposed towards air carriers, subsidies to energy and the environment, subsidies granted in the context of large cross border or international cooperation projects. Authorities should be mindful of this if the measure falls within one of these areas or sectors.
If your measure is outside of the scope of these prohibitions, step three should be next considered.
Step 3: If you are in scope of the UK-EU Trade and Cooperation Agreement, assess the subsidy against ‘the principles’
The UK and EU have agreed the following principles which should be respected when designing a measure. The UK and EU have agreed the following principles which should be respected when designing a measure:
- Subsidies should pursue a specific public policy objective to remedy an identified market failure or to address an equity rationale such as social difficulties or distributional concerns (“the objective”).
- Subsidies are proportionate and limited to what is necessary to achieve the objective.
- Subsidies are designed to bring about a change of economic behaviour of the beneficiary that is conducive to achieving the objective and that would not be achieved in the absence of subsidies being provided.
- Subsidies should not normally compensate for the costs the beneficiary would have funded in the absence of any subsidy.
- Subsidies are an appropriate policy instrument to achieve a public policy objective and that objective cannot be achieved through other less distortive means.
- Subsidies’ positive contributions to achieving the objective outweigh any negative effects, in particular the negative effects on trade or investment between the Parties.
When designing a subsidy (and assuming the tests in steps 1 and 2 above have been met/adhered to) a public body should be able to demonstrate compliance with these principles and to that end the DBEIS have drafted a helpful checkbox document. We would highly recommend its use in practice to assist in defending any potential challenges in the Courts and to assist with the reporting requirements discussed later. The document can be found here.
Exemptions to meeting the ‘Principles’
Authorities will be glad to note that the state aid de minimis rules are replaced within the TCA.
The TCA ‘de minimis’ (not its formal name but the term is used herein out of familiarity) allowance is 325,000 Special Drawing Rights, approximately 350,000 pounds, per beneficiary over a three-year period.
Authorities will note the increase here from the previous state aid de minimis limit which will allow for some further freedoms in smaller subsidy awards. The awarding body should take care however to double check at the time of the award what the value of 325,000 Special Drawing Rights amounts to in pounds as there is the risk of fluctuation from the time of this article.
Subsidies of Public Economic Interest
Subsidy for Services of Public Economic Interest (SPEIs) is a new framework created to replace the ‘SGEI Decision’ which was a mainstay of the EU state aid regime and many authorities will be familiar with their operation, particularly within the context of social housing. Article 3.3 of the TCA sets out conditions for measures to be lawfully delivered pursuant to the SPEI exemption, including:
- measures should comply with the ‘principles’ listed above (save where doing so would obstruct the performance in law or fact of the particular task assigned to the economic actor concerned). To that end, when designing an SPEI, we recommend the tick box for principles discussed above is similarly completed
- compensation should be limited to what is necessary to cover all or part of the costs incurred in the discharge of the public interest task, taking into account the relevant receipts and a reasonable profit for discharging that task
- public authorities must also ensure that any funding for SPEI does not cross subsidise the beneficiary’s commercial activities
- details of measures which surpass 15,000,000 special drawing rights will be required to be published. There is however a specific SPEI de minimis allowance of 750,000 special drawing rights to an economic actor (over a rolling three year period) under which the measure will be exempt from the rules.
Guidance on regional aid and other sectors
The UK and EU in their Joint Declaration on Subsidy Control Policies have also set out guidance in relation to three key areas: subsidies for the development of disadvantaged areas (regional aid), subsidies for transport and subsidies for research and development. Whilst the policies are not binding they are considered guidance when awarding subsidies in those areas. These subsidies can be made provided a number of considerations are taken into account for instance the size of the beneficiary and the size of the investment project. Specific advice should be sought by those exploring subsidies in these areas.
Step 4: Assess the likelihood of triggering a dispute or unilateral remedies under WTO ASCM rules and other FTAs
Whether or not a measure has been analysed as compliant (by way of adherence to the ‘principles’ or by way of one of the exemptions discussed above when it comes to the TCA) the awarding body should nonetheless consider if the measure could trigger a dispute under the WTO ASCM or under a FTA.
In order to assess whether the measure could give rise to a dispute or action from another party the DBEIS recommend that a checklist of the following points is undertaken in the context of the measure in question:
- Value/intensity of the subsidy – measures which are high in value (e.g. in the hundreds of millions) or high in intensity (e.g. 70% of total project costs) are more likely to raise concern with other WTO members or a FTA partner.
- Historically sensitive sectors – sectors such as steel, automotive and aerospace have previously been the focus of WTO action and so with these sectors there may be a greater risk of a partner or WTO member starting a dispute. Subsidies in this area should thus be approached with caution.
- International competitors – measures which affect sectors which commonly have international competitors (particularly those which are large and of importance to their country’s economy) are more likely to attract challenge.
- Impact on trade – Measures which affect the sales volume, prices or profits of international producers of similar goods, either within the UK or in foreign markets could increase the risk of WTO or FTA challenge/dispute. Impact on investment in the same way should also be considered for the purposes of the TCA.
The greater the number of these characteristics that are applicable to the subsidy in question the greater the likelihood of a dispute/challenge arising. Whilst there is no guarantee of no action if none/few of these characteristics are present, it may well be indicative. Public bodies should thus be making this assessment on a case by case basis alongside legal advisers.
Step 5: Record the award of the Subsidy
A key feature of the TCA is transparency when awarding subsidies. There is thus a requirement that within six months of granting a subsidy, the details of it should be made available on a public database. The details should include:
- the name of the recipient
- the date of the grant, duration of the subsidy and any time limits attached to the award
- the amount of the subsidy
- the legal basis and policy objective of the subsidy.
The DBEIS are in the process of preparing a system which will allow for the publication of these details and authorities should thus ensure they are captured in the interim so they are ready to publish such when that system goes live. Also note that under the TCA any interested party can request an explanation of how the subsidy respects the ‘principles’ and this should be delivered within 28 days.
We trust this article has assisted clients in having a general overview of the state of play in respect of subsidy control regulations. Our Public Sector Team is at hand to assist with any further specific advice which you may require.
For further information regarding the above, please contact Ajay Patel or another member of the Public Sector Team.
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at March 2021.